Why The Next Global Crisis Will Be Unlike Any In The Last 200 Years

Sometime soon, we’ll take a shot at summing up our long-term economic future with just a handful of charts and research results. In the meantime, we’ve created a new chart that may be the most important piece. There are two ideas behind it:

Wars and political systems are the two most basic determinants of an economy’s long-term path. America’s unique pattern of economic performance differs from Russia’s, which differs from Germany’s, and so on, largely because of the outcomes of two types of battles: military and political.

The next attribute that most obviously separates winning from losing economies is fiscal responsibility. Governments of winning economies normally meet their debt obligations; losing economies are synonymous with fiscal crises and sovereign defaults. You can argue causation in either direction, but we’re not playing that game here. We’re simply noting that a lack of fiscal responsibility is a sure sign of economic distress (think banana republic).

Our latest chart isolates the fiscal piece by removing war effects and considering only large, developed countries. In particular, we look at government budget balances without military spending components.

(Military spending requires a different evaluation because it succeeds or fails based on whether wars are won or lost. Or, in the case of America’s adventures of the past six decades, whether war mongering policies serve any national interest at all. In any case, military spending isn’t our focus here.)

There are 11 countries in our analysis, chosen according to a rule we’ve used in the past – GDP must be as large as that of the Netherlands. We start in 1816 for four of the 11 (the U.S., U.K., France and Netherlands). Others are added at later dates, depending mostly on data availability. (See this “technical notes” post for further detail.) Here’s the chart:

Not only has the global, non-defense budget balance dropped to never-before-seen levels, but it’s falling along a trend line that shows no sign of flattening. The trend line spells fiscal disaster. It suggests that we’ve never been in a predicament comparable to today. Essentially, the world’s developed countries are following the same path that’s failed, time and again, in chronically insolvent nations of the developing world.

Look at it this way: the chart shows that we’ve turned the economic development process inside out. Ideally, advanced economies would stick to the disciplined financial practices that helped make them strong between the early-19th and mid-20th centuries, while emerging economies would “catch up” by building similar track records. Instead, advanced economies are catching down and threatening to throw the entire world into the kind of recurring crisis mode to which you’re accustomed if you live in, say, Buenos Aires.

How did things get so bad?

Here are eight developments that help to explain the post-World War 2 trend:

In much of the world, the Great Depression triggered a gradual expansion in the role of the state.

Profligate politicians were abetted by the economics profession, which was more than happy to serve up unrealistic theories that account for neither unintended consequences nor long-term costs of deficit spending.

With economists having succeeded in knocking loose the old-time moorings to budgetary discipline (see first 150 years of chart), responsible politicians became virtually unelectable.

Sadly, all of these developments are still very much intact (excepting small improvements in budget projections that we’ll address next week). They tell us we’ll need substantial changes in political processes, central banking and the economics profession to avert the disaster predicted by our chart. And we’re rapidly running out of time, as discussed in “Fonzi or Ponzi? One Theory on the Limits to Government Debt.”

On the bright side, a fiscal disaster should help trigger the needed changes. Every kick of the can lends more weight to the view expressed by some that the debt super-cycle – including public and private debt – needs to go the distance, eventually reaching a Keynesian end game of massive collapse. At that time, we would expect a return to old-fashioned, conservative attitudes toward debt.

As for the chart, it helps to flesh out a handful of ideas we’ve been either writing about or thinking of writing about. We’ll return to it in future posts, including one drilling down to the individual country level that we’ll publish soon.

This analysis fails to address the cause of the unprecedented spike up during and immediately after World War II:

the discovery of mind-bogglingly huge, near-surface regions of light, sweet crude oil in free flowing reservoirs. The first was in Texas in the 1930s, the second in Saudi Arabia in the early 1950s.

This was a ONE TIME windfall for humanity, which we of course promptly squandered like drunken heirs. Having ramped up agricultural production, population, and infrastructure as if this was a permanent new golden age for humanity, we will now be eaten alive by maintenance costs until the inevitible population collapse.

The over-arching condition will be contraction, for the rest of this century at minimum. Invest accordingly.

What you are witnessing is heroics. The central planners saw the signs too and rather than sit back and let nature take its course, they made a blood pact with the devil and have been sacrificing the future and burning through resources like mad men trying to forestall what is by all measures inevitable.

They could do this because we allowed them to, and they knew we would. They've done a little good for their own purposes, while digging a grave for the rest of us that will pretty much swallow 400 years of "progress" (yeah right) and probably 5 billion souls, before the ashes have settled down.

It's like this, see. The devil will let you run for a while but in the end he gets his due, and all the dodging you can do won't hold back the day forever.

You feel that hot wind at your back, making your hair stand up on end?

Then the warnings are not necessarily for you. If you have been planning for years then you are prepared for the eventual outcome.

Then why concern yourself with the exact day that it happens and be at peace and content now...since you have been planning for years? You probably have it all down, right?

These warnings are for others whom may not yet have heard the clarion call to arms and battle.

They need to listen to this message also.

Everything that is published is not just published just for your sake. It is not all about you.

It is about OTHERS so that they may be made aware and prepare.

Time is growing short and we approach the Day of Reckoning with each and every passing day.

It is an eventuality which will happen. I am at peace with it. I am at total peace with it.

Perhaps it is you who need find that peace. Perhaps you are not as prepared as you need to be.

Preparation begins in the mind. Then it progresses to an outward manifestation and realization of what is needed for the problems you will face.

Think of this like ...oh...Dying. The final stage of Dying is peace and acceptance. You really are powerless over it.

Well our Economy and our Nation is DYING. Most have denied it, became angry about it, bargained with it, became depressed about it, then became at peace with it and accepted it. Most vacilliate between all of the first four stages until they accept it. That is when true preparation begins.

Yet I still read the articles because it tells me that the regression is continuing slowly and that I still have time.

Go out and live a little bit. Watch a movie. Relax a bit. Enjoy some life while you still can...if you are already prepared.

If you are not prpared...you had best get prepared. The shitstorm that we have already been through will seem like the Good Ol' Days when the Shitstorm intensifies.

I have been on vacation the past 2 weeks in a nice warm climate, but have been getting my fix on a new iPhone. This is new for me and causing serious eye strain. Wife kept asking "what are you doing"? Hope she does't get wise to the addiction.

EDIT: ZH is always open in a browser window. Even if I decide "I've had enough" all I have to do is drive 1-2 miles and see "them" floating around aimlessly in the streets. It quickly reminds me why I am here to begin with.

I was an ZH addict for almost two years. I'm proud to say that I quit about a month ago and I'm starting to believe now that maybe the end of the world is not just around the corner after all. You know, after you've heard the boy cry wolf hundreds of times and each time urging everyone to buy gold.. gold... gold... silver... silver... silver, you start thinking that maybe there's some kind of brainwashing going on here. The big question is: WHO IS SELLING THE GOLD AND SILVER? Who are the individuals flooding this site with endless gloom and doom stories and why are they doing that, if not with vested interest? Once you begin to understand this, then you're immediately cured of your addiction to ZH. No need for a 12-step program: a single epiphany will do. You'll be amazed at how much time you suddenly have on your hands to do something more interesting and useful that reading countless stories telling us that we all fucked.

The reason the globalists say that the middle class must be eliminated is because they consume far too much and are threatening the natural resources. One family homes are a threat to sustainability. The Agenda 21's sustainability project is going to free up 40 of US land mass and return it to nature.

We were once untooled primates foraging for food among the grasses of the plains across Mother Africa.

It wasn't so long ago, actually. The world is slow and she probably only remembers us like that. All the rest has happened too fast for so slow a mind to embrace. So maybe she won't laugh too hard when we've fallen from this high place, and she'll still love us for being simple creatures moved by modest dreams.

Tyler Durden: In the world I see - you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You'll wear leather clothes that will last you the rest of your life. You'll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you'll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway.

+

Narrator: And then, something happened. I let go. Lost in oblivion. Dark and silent and complete. I found freedom. Losing all hope was freedom.

The original post has the right idea. However the reason the coming crisis will be unlike any other in 200 years (why 200 years?) is because the global economy didn't even exist in any form until the last 50 years.

Seriously. We've been off the edge of the map for that entire time, pretending we know exactly where we are going and how to get there. That's 50 years of experimentation while the human population rose from a sustainable 2 billion to nearing 7 billion.

Christ on a pencil -- whose bright idea was that anyway?

And of course let us not forget, during those same 50 years we managed to get nearly the entire rest of the world addicted to a range of really expensive and potent neuro-toxic hallucinogens like crude oil, sports entertainment, automobiles, cheap credit, high fructose corn syrup, tobacco, rock music, middle class suburban living, Disneyland, and diabetes.

7 billion people or so, most of them Jones-ing for our version of high-grade post-industrial smack. And the rest just in the way of the resulting consumer steamroller.

We suck.

There is going to be so much pain, I can't even imagine it. Well actually yes I can, but I wish I couldn't.

The author is describing a fiscal crises that requires immediate and very substantial reductions in the size, scope and spending by government, to bring finances back into line.

Sadly, of all the possible solutions to this crises, the one that is not - and never will be - on the political agenda is this course of action. The political elites will not consider it. Ever. An addiction to ever higher state spending by US, UK & EU governments provides all the proof anyone needs.

Oh look another fucking chart. Well I'm convinced now. Been looking at these things since Howard Ruff and his Ruff Times newsletter back in the 70's. Ain't one of them been right yet. Oh well maybe this one.

Lewis told participants that the International Energy Agency's (IEA) own "comprehensive" analysis in its World Energy Outlook of the 1,600 fields providing 70% of today's global oil supply, show "an observed decline rate of 6.2%" - double the IEA's stated estimate of future decline rate out to 2035 of about 3%.

This looming crisis will send humanity right off its rails. Out of the 7.2 billion human bloodsuckers running amok now, and with everything depleting right before our eyes, after this disaster strikes fewer than 10,000 human parasitic predators will remain. And if they're lucky they'll be eating weeds and ants.

I don't get this chart. The US has run budget deficits nearly every year since 1940. Is he saying that until 1970 all budget deficits were attributable to defense spending? Or did other countries budget surplusses offset the US deficits? Not sure what to make of this...

It is more like the fall of the Roman Republic condensed into 30ish years. Everything Rome did wrong, we are doing wrong, only faster... thanks to fiat money, high speed communications and central banks.

We even have out own succession of decadent despots... only O'bummer golfs while the US burns.

I'm writing a novel. Well I'm pretending to. One of the central tenants of the story is that the periods of recorded human history (we are in one now, lasting since about 8,000 years ago) have numbered not one -- but thirteen. Each time we arise from simple beginnings to greatness dutifully recording our triumphs for what we suppose to be all eternity, and then in a great spasm of miscalculation we are utterly ruined to so great an extent that we lose all connection to what just happened.

And then our complex systems of governance, communication, travel, record keeping and traditional continuity decay almost immediately, because they were completely dependent on other system that were little more than a temporary agreement with the devouring laws of physics.

It's fiction, but only by the skin of its teeth.

The short of it is we begin again -- and again -- and again -- with no connection to the past and nothing to work with, from scratch as it were. We rediscover domestication, writing, societal organization. New languages, new religions are born from the scraps of something older but forgotten. As we do this we think once again that we are the greatest beings ever to tread the ground, ply the seas and fly the winds. And any vestige or hint of anything that might have existed before must be simple myth, fables, tales for children.

Thirteen times.

Actually, I'm not even certain that it is fiction. Some days I look around and I just don't know.

There is a character in the story. Her name is Darkatana and she is ancient beyond comprehension. I walk under the stars and moon at night and all the world seems ancient and tired, like we've been this way so many times -- too many times -- and I half expect her to step out from behind a tree and say You shouldn't know about that part.

Profligate politicians were abetted by the economics profession, which was more than happy to serve up unrealistic theories that account for neither unintended consequences nor long-term costs of deficit spending.

In other words, we are mere lab rats in this greatest monetary experiement since the beginning of time.

They've built like Pharaohs but worse. This is pyramids on fucking steroids and the ultimate pyramid scheme! They built 200 years worth of infrastructure and supply lines in 5+ years for a global population that is probably peaked and will be shrinking rather than growing further.

The host planet cannot sustain all the parasites feeding off its resources. There are severe water shortages, fuel shortages, seed shortages and livestock shortages. There are more weather related challenges to deal with than ever because populations expanded and settled in areas where floodings and severe weather conditions occur within 100 year cycles. Birth control and the spreading of terminal diseases, viruses crossing over from animals to humans and so on will do the rest.

All that in a nutshell. The deal was made 5 years ago to build, build, build, mine, mine, mine come hell or high water for future demand that may be here in a few decades. Not to mention, people are using less of everything and the increased cost of transportation has an adverse effect on all this mobility and transportation expansion. Airlines decreasing routes, rail lines meging and decreasing traffic, shipping lines pulling inventory because prices are collapsing and so on and so forth.

Let me begin by stating that I agree with your overall thesis and bring a few minor points for your consideration to the comments section:

1. "Wars and political systems are the two most basic determinants of an economy’s long-term path." Comment: Neither wars nor politics are systems. Modern wars (since Napoleon) are the last resort for tensions, frustrations, and expressed fear of incomptent and corrupt politically run governments that have no other way to appease their own populace and to retain their hold in Power. Obviously, and traditionally, War allows the politically bent schemers to ignore the laws that would normally place their necks at the mercy of Mdme. Guillotine.

2. Social systems of governments must, a priori, be in harmony with the highest ordering of the natural collective human behaviours of man which are defined as Theocratic, Republican and Monarchic and accordingly, if this is not achieved then, chaos rules supreme as today, and wars, slavery, killings, corruption, disorder become the Primary intense focus of the political sway and all that attached thereto.

3. There is only one acceptable "Economic Theory" - despite the some 30++ established "learned" schools of "economics" - and this is (these days) political expediency which, of course, corresponds precisely with the political focus (item 2 above) defined above. Economics is a deterministically organized sham; there is no science here, and nor will its pretenders permit the elements of "economics" to well established scientific scrutiny or discipline. Global economics is essentially run as a Ponzi; clearly seen as being in a state of collapse when the suckers leave the tables (with their money) and to be replaced by the wealth from productivity (of the people) as "credit" for the Banker. No commercial Casino, no matter how crooked, could survive by utilizing such antics.

4. The major error of our belief system is that, as you write, is that "politics" is a system. Politics is not a system, as it represents all that is ill in unaccomplished men and who seek fortune without productivity, the gains and wealth of the production of others, the expressions of psychopathic egoism in the sadistic imposition on their fellow man, and their sexually suppressed ignorance defining ideations of fantasy for personal engrandishment.

5. The established Banking system which began well over 5,000 years ago for the protection of the peoples through the untouchable and unassailable pillars of the Temple, has been captured and significantly manipulated so as to replace the three main foundations of society as mentioned in item #2 above. The higher ordering of the Bankers hierarchy through the Central Banks and upwards ensures absolutely, that Theocracy, Law and Monarchy are completely subservient to the Banking System (and it is a system) and run through an ordering of "Economists" as the apologists which bring "credibility" to the unwashed; Politicians who do the bidding and represent a very low-cost overhead for doing business; bureaucrats, as those that criminalize and enforce those who dare dissent, and the wannabees, who do the wet-work all answerable to a higher and silent Authority. A Parasite in its true nature, that will indeed kill its victim due to its own ignorance of the Universal Principles in play.

6. The "credit" which each form of government (Theocracy, Law and Monarchy - and any combination thereof) must bring to the governed Society (note: not State) is unique to each form and must be of the mechanism of leverage for the unique force that each form requires to establsh and maintain integrity, coherency, homogenuity, the pursuit of happiness, security and acceptance, in our global Society is absent or could be analogically compared to the illicit drugs such as 'Acid' and such like. Today, there is no essence of being; no integrity; no honour and no God.

Today, World "leadership" is not only ignorant but incompetent (as well as corrupt) where the only credit any leader, and they are all political, brings and offers is ego, lies, theft and incompetence. There is no integrity in our world goverance today and it will fail; it is failing and rapidly so but as history shows us, we humans need to do a lot of suffering in order to move forward through learing our lessons.

The question begs: Where in the Education system of the USA, did those top officials (e.g. Clapper and Clinton, et al) learn to embrace Totalitarianism, Fascism, Bolshevism, Communism, which they are intent on imposing on the US and World populations? What schools did they attend?

"Neither heavenly nor earthly, neither mortal nor immortal have we created thee, so that thou mightest be free according to thy own will and honor, to be thy own creator and builder. To thee alone we gave growth and development depending on thy own free will. Thou bearest in thee the germs of a universal life."

"You can argue causation in either direction, but we’re not playing that game here."

This I think is the reason why you have missed THE point, or the cause. Causal identification does not fall within the category of games but instead belongs to the science of logic. The fact that their are effects is only be-cause there must be a cause of the effect. Cause begets effect; effect was born from a cause.

"Wars and political systems are the two most basic determinants of an economy’s long-term path."

Your first (and second) premise is tackling the effect and not the cause. And this is why you seem to have missed the point. An economy's long term path is determined by the productive labor of its participants [insert Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations here]. Regardless of the political system or peace status, it is always the producers/laborers who cause the effected path. To whatever degree that the political system supports or stifles their freedom to act and does enable or disable their productivity, it nevertheless is always the producer/laborer that does the doing and not the "political system." Of course by "political system" we mean those citizens within government whom are not engaged in productive labor but instead their livelihoods, THEIR long term path (also), is determined by the productive laborers as the productive laborers carry everyone else on their backs to go along for the ride no matter how fast or slow it is. The speed is of a direct inverse relationship between the weight and number of riders versus carriers.

If you intend to champion the cause of how to make things get good, then this is the point that needs to be identified as the cause: The third central bank, The Federal Reserve is how things got this bad. In fact, if you overlay a chart of the US dollar's value with your chart, then you will find that one causes the other, not vice versa.

There are not 8 reasons why things go this bad. There is only one cause; counterfeiting. There is only one solution:

Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000.

However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs).

This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density.

The IEA’s long-run cost curve has conventional crude in a range of $10-$70 a barrel, whereas for unconventional crude the ranges are higher: $50-$90 a barrel for oil sands, $50-$100 for light-tight oil, and $70-$90 for ultra-deep water. Meanwhile, in terms of energy content, a barrel of crude oil is worth 1.4 barrels of NGLs.

Threefold rise

The much higher cost of developing unconventional crude resources and the lower energy density of NGLs explain why, as these sources have increased their share of supply, the industry’s upstream capex has increased. But the sheer scale of the increase is staggering: upstream outlays have risen more than threefold in real terms over the past 12 years, reaching nearly $700bn in 2012 compared with only $250bn in 2000 (both figures in constant 2012 dollars).

Coinciding with the rise in US tight-oil production, most of this increase in upstream capex has occurred since 2005, as investments have effectively doubled from $350bn in that year to nearly $700bn in 2012 (again in 2012 dollars).

All of which means the 2013 WEO has the oil industry’s upstream capex rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy.

The industry has been able and willing to finance such a dramatic increase in its capital investment since 2000 owing to the similarly dramatic increase in prices. BP data show that the average price of Brent crude in real terms increased from $38 a barrel in 2000 to $112 in 2012 (in constant 2011 dollars), which represents a 195 per cent increase, slightly greater in fact than the increase in industry capex over the same period.

However, looking only at the period since 2005, capital outlays have risen faster than prices (90 per cent and 75 per cent respectively), while in the past two years capex has risen by a further 20 per cent (the IEA estimates 2013 upstream capex at $710bn versus $590bn in 2011), while Brent prices have actually averaged about $5 a barrel less this year than in 2011.

Iran not a game changer

That prices have fallen slightly since 2011 while capex has risen by a further 20 per cent is a flashing light on the industry’s dashboard indicating that its upstream growth engine may finally be overheating.

Without a significant technological breakthrough reversing the geological forces that have driven the unprecedented increase in upstream investment over the past decade, prices will have to rise further in real terms from here or else capex – and with it future oil production – will fall.

It should also be emphasised that this vast increase in capex has occurred during a prolonged period of record-low interest rates. Once interest rates start rising again, this will put further pressure on the industry’s ability to make the massive capital outlays required to keep supply growing.

Of course, the diplomatic breakthrough achieved with Iran over the weekend could provide some much needed short-term relief to the market, as Iran’s exports could ultimately increase by up to 1.5m barrels a day if and when western sanctions were to be fully lifted. But this would not change the dynamics of the industry’s capex treadmill in any fundamental sense.

Even if global oil demand only grows at 1 per cent a cent a year, those extra barrels would be would be fully absorbed by the market within about 18 months. And that is probably how long it would take for Iran’s production and exports to return to pre-sanctions levels in any case.

Alternatively, if we take the IEA’s estimate that global production of conventional crude oil from all currently producing fields will decline by 41m barrels a day by 2035 (that is, by an average of 1.9m barrels a day per year), then Iran’s potential increase of 1.5m barrels a day would compensate for just 10 months of natural decline in global conventional-crude output.

In short, behind the hubbub of market hype about a new age of oil abundance, the toil for oil is in fact now more arduous and back-breaking than ever.

This should worry everybody, because with the evidence suggesting that consumers are reluctant to pay much above $110 a barrel, it is an open question what happens next to the industry’s investment plans and hence, over time, to the supply of oil.

Mark Lewis is an independent energy analyst and former head of energy research in commodities at Deutsche Bank; Daniel L Davis, a lieutenant colonel in the US Army, is co-author

High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes =====economic death spiral.

Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

Of course they will fail - because the disease is expensive oil.And there is no substitute

The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

This moment will be known as the end of the industrial revolution by the few who survive.

Lewis told participants that the International Energy Agency's (IEA) own "comprehensive" analysis in its World Energy Outlook of the 1,600 fields providing 70% of today's global oil supply, show "an observed decline rate of 6.2%" - double the IEA's stated estimate of future decline rate out to 2035 of about 3%.

Good catch, gtb. Pintos were only made from 1971 to 1980. I actually had a 76 Pinto for a while, used it as a commute car for a work site about 30 miles away, as it got real good mileage for that era, what with one of the first aluminum block 4 cylinders... engine had lost a lot of its zip by 80,000 miles, so used it to pay a house-sitter for the pets when we took a 10 day trip.

Peak oil could have been manageable if some planning was involved, but the central planners today are only focused on theft, so that option is gone. Ultimate crackup coming.